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Friday, December 16, 2011

The slow and steady way to grow

With many signs pointing to slower economic growth not just next year but over the longer term, Insight examines the implications of this trend.By Aaron Low & Melissa Tan
LIKE many Singaporeans, Mr Tan See Keong, 41, works long hours to support his family.

He is a driver and earns $1,500 a month. His wife is a supermarket cashier and earns $900 a month. They live in a three-room flat with their son, aged eight.

Most of their income goes to paying off bills but they manage to save $200 a month.

They eat out three times a week but with the economy expected to hit a rough patch next year, Mr Tan expects to cut down on such treats.

'We will cook more at home. My wife can also take food to work. Now, in one week, we go out for dinner three times, but we can cut it to maybe one time,' he says.

Like Mr Tan, many Singaporeans are bracing themselves for a downturn next year.

Last month, the Trade and Industry Ministry forecast that Singapore's economic growth would slow to a crawl of between 1 per cent and 3 per cent next year, largely due to problems in Europe and the United States.

More worryingly, the downbeat assessment may last longer than just a year.

Last week, Prime Minister Lee Hsien Loong warned that growth of 1 per cent to 3 per cent 'will not be too uncommon' in the years ahead.

For Singapore, which has been growing at an average annual rate of more than 8 per cent since its independence in 1965, this much slower pace of growth is both unfamiliar and unsettling.

In recent years, growth has been volatile - bouncing back from the 2008-2009 recession to hit 14.5 per cent last year before slowing to about 5 per cent this year.

Some analysts say the slower pace of future growth is to be expected as the economy matures. Others, however, warn that slow growth will be painful for both individuals and companies.

What do the numbers mean for wages, jobs and prices? How will it affect the drive for more inclusive growth?

Wages, jobs and prices

IN THE short term, the reasons for the slowdown in growth are clear.

Next year, the global economy is expected to grow by 4 per cent, weighed down by weak growth in all three of the world's largest markets - Europe, the US and Japan.

Singapore Management University (SMU) Assistant Professor Davin Chor does not see any easy solutions to the global economy's current funk.

'A lot, then, depends on how long a slowdown the developed countries will go through; namely, whether there will be a sharp rebound or whether we are looking more at a scenario akin to Japan's 'lost decade',' says Prof Chor.

The pain of a cyclical downturn will hurt both companies and workers.

Business confidence, which underpins firms' investment and hiring decisions, has fallen sharply in recent months, according to several surveys.

Wages and jobs are also likely to be hit.

Retrenchment is rising in sectors buffeted by the global downturn, such as electronics. The labour union has warned of more pain to come next year.

Associate Professor Randolph Tan, of SIM University (UniSim), forecasts a slowdown in job creation and a small rise in unemployment next year.

He expects between 70,000 and 85,000 jobs to be created next year, fewer than the expected 100,000 to be created this year.

At the same time, however, inflation will continue to be high, fuelled by persistently high prices of commodities, as well as higher prices of cars and housing.

This year's inflation rate is estimated to be around 5 per cent. The central bank has said that next year, prices should continue to rise between 2.5 per cent and 3.5 per cent.

There is a real worry that inflation might completely eat away any potential wage gains, especially for lower-income earners such as stall assistant Fadilah Ismail.

Madam Fadilah, 47, who earns $900 working in a coffee shop, is seeing more of her wage go towards basic necessities, such as rice and milk.

'I used to be able to save a bit of money together with my husband's salary. But now I am paying more for rice even though I buy cheaper brands, and I can't save any more,' she says.

Analysts say that managing inflation will be all the more critical during periods of slow growth, as high prices will hit low-income earners that much harder.

In Singapore's case, the main tool to fight inflation is the exchange rate policy, as imported inflation through food and electricity directly affects families.

But strengthening the exchange rate will also hurt Singapore's exporters, making the use of exchange rate policy a tricky one during a time of slow growth.

Beyond the regular economic and business cycles, Singapore's economy is also going through a structural change that will affect its ability to grow as fast as it did previously.

Despite its status as a developed economy, Singapore managed to grow at an average of 6per cent from 2000 to last year.

Singapore's most recent experience with protracted slower growth of less than 5 per cent was between 2001 and 2003.

After a sharp recession in 2001, due to the downturn in the global electronics cycle, the economy grew by an average of 4.3 per cent a year for the next two years.

That period sparked intense soul-searching and the formation of the Economic Review Committee. New ways to grow the economy were looked at, culminating in the controversial decision to build the two integrated resorts and to bring Formula One motor racing here.

As Singapore looks ahead to slow growth being a more permanent state of affairs, experts like DBS economist Irvin Seah say it is an inevitable part of development.

'Every economy and country has physical limits, especially for a small economy like Singapore,' says Mr Seah.

'There is only so much that good policy, technological innovation and the Internet can do to push Singapore's production frontiers,' he adds.

Back in 2009, the Economic Strategies Committee had already signalled the onset of slower growth.

It noted that the long-term potential growth rate for Singapore was between 3 per cent and 5 per cent, a rate much lower than the historical average annual rate of 8 per cent.

In one simulation of the future of Singapore's economy, Lee Kuan Yew School of Public Policy Associate Professor Tan Khee Giap set out three growth scenarios.

The base scenario is for Singapore to grow at about 4 per cent for the next 10 years, assuming the Republic manages to raise workers' productivity.

The optimistic scenario is for Singapore to grow at about 5 per cent, closer to what it achieved in the past decade.

But if it does not manage to raise the productivity of its capital and labour inputs, Singapore could grow at just 1.78 per cent a year for the next decade.

Slow growth is not bad growth

SLOW growth over the long term, in Singapore's context, is not necessarily bad growth, say some economists.

What matters more for Singapore's economy is the quality of growth. In other words, it is not how big the pie gets but how nice it tastes and whether everyone gets a bite of it.

Mr Manu Bhaskaran, chief executive of Centennial Asia Advisers, notes that Singapore is already, in per capita terms, one of the richest countries in the world.

'As you approach the existing frontiers of economic potential, growth will inevitably slow down,' he says.

He points out that many successful northern European economies grow at around 2 per cent and still deliver 'very high citizen welfare, enviable public services and continued economic dynamism, so we should not be fixated by our growth coming down to 3 per cent or thereabouts'.

Instead, he says that the aim of economic policy should no longer be to maximise gross domestic product (GDP) growth.

'It should be explicitly to maximise citizen welfare, which might include such factors as per capita consumption,' he says.

OCBC economist Selena Ling says the Government will have to focus more on maintaining high standards of living, while ensuring the lower-income are well supported.

'I think if the economy, which is already at full employment, manages inflation well, there is less to worry about with slow growth,' she says.

She points out that one of the main criticisms of the previous mode of economic growth, which was to grow as fast as the economy allowed, was that it generated huge inflationary pressures.

'So, even if you grew fast, it was unsustainable growth. It might be better to grow slowly but keep prices stable, so that wage increases are kept as real gains,' she says.

Another criticism of the 'grow as fast as we can' paradigm was that it widened the income gap. This is borne out by the latest wage figures from the Department of Statistics, which show that average household income per household member last year for the top 10 per cent was $9,174.

By comparison, the lowest 10 per cent of households had average per capita income of just $354, while the next 10 per cent had per capita income of $675.

Says DBS' Mr Seah: 'Slow growth may not be bad, especially if it allows the Government to tackle the issue of the wage gap in a more effective manner.'

Inclusive growth?

RECOGNISING that the income gap has widened significantly over the years, the Government has said it will focus on growth that is inclusive, instead of simply chasing growth.

It has set a target of raising real median incomes by 30 per cent over the next decade. The Government has also pledged to spend more on education, social safety nets and public transport.

But with growth slowing, economists such as SMU's Prof Chor warn that it will be more difficult to achieve inclusive growth.

'It becomes much harder to generate a rise in the share of wages in GDP when economic conditions are slowing and the size of the overall economic pie is roughly constant,' he says.

But National Trades Union Congress deputy secretary-general Ong Ye Kung disagrees. He admits that a slow growth era may mean companies cutting back on investment and reducing training for their workers.

At the same time, more time is freed up for training.

'In Singapore, the Government is able to support upgrading in a big way. We can take the opportunity to upgrade skills - not just generic skills, but dive deep to build expertise in workers,' he says.

'The Government's message for productivity and inclusive growth must be even louder and clearer in a downturn.'

If there is one thing that all analysts agree on, it is that future growth must be powered by productivity, though the road is hard and long.

The Government has set a target of raising productivity by between 2 per cent and 3 per cent over the next decade, rolling out plans to help different industries achieve this.

Says UniSim's Prof Tan: 'We have to focus on strengthening productivity improvements because this is the one thing that appears to have eluded us. Part of the way forward, I feel, involves realising there is no other way.'

Inclusive growth is also about making sure workers get a share of productivity gains. Firms have in recent years been taking a larger slice of the gains from profits, leaving less for workers' wages.

Singapore workers' share of the national income declined from 47 per cent in 2001 to 41 per cent in 2006. That is lower than the 60 per cent or more that their counterparts in other developed economies enjoy.

To counter this trend, the labour movement launched its own $40 million Inclusive Growth Programme in August last year, which aims to help companies raise productivity. In return, the firm has to share the gains with workers.

But the wage gap has grown so large that it will be difficult to claim success at inclusive growth without spending more on the social safety net and subsidies, some analysts say.

To this end, a greater burden will fall on the Government and its ability to generate strong returns on its investments, to supplement its revenue from taxes.

Prof Tan of the Lee Kuan Yew School of Public Policy says: 'Slow growth means we have to count on Net Investment Returns to top up special transfers.' In fact, special transfers allocated per year have more than doubled to about $7billion over the past three years, from an average of $2.6 billion a year between 2000 and 2008.

DBS' Mr Seah identifies the Workfare Income Supplement (WIS) as one major area that needs to be beefed up. Started in 2007, the scheme tops up the incomes of older workers who earn below a certain threshold.

Likewise, the need to continually ensure social mobility in the system will also mean large investments in education, he adds.

For stall assistant Madam Fadilah, she sees education for her children as the passport out of her current plight.

She hopes that her younger daughter, now in Secondary3, makes it to junior college (JC). Her oldest son is with the Institute of Technical Education, while her youngest daughter is still in primary school.

'I will work till I drop. But if she can make it to JC, she can go to university, get a good job. Then it will be all worth it.'